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What is a chargeback and how do I keep them to a minimum?

When it comes to processing credit cards, the biggest risk to you as a business owner is where the banks charge back the credit card from your merchant account.

What this means to you is that not only have you sent the goods, but you have also not received any money for those goods. You did initially receive the money when you processed the credit card successfully, but the bank has taken this money back out of your account as the cardholder has disputed your transaction, and you have not been able to supply sufficient proof that the cardholder ordered and received their purchase.

In most instances because you cannot show a signature for your online order you will not be able to contest the charge back successfully.

Chargebacks Hurt!

If you are dealing in expensive low margin products such as computers or musical equipment and so forth, then one chargeback incident will take a lot of sales to recover the losses from a sale gone wrong. Whereas a chargeback on a low value higher profit product will be inconvenient, but it will be an absorbable loss for the business.

Therefore, you need to have procedures in place and an understanding of what to look for in determining whether you will fulfil an order or not. When in doubt, you will want to gather further confirming evidence that the purchaser is indeed the valid the cardholder and has authorised your transaction.

Precautions You Should Take

Sometimes you will need to have the person fax you a photo copy or scan of their card with a signature. This obviously flies in the face of fast convenient e-commerce transactions. However, if you have an expensive product the additional customer service time will be well worth it.

Fortunately, within Australia the attempts at fraud are very minimal, whereas orders from many African and Asian and middle European countries are highly likely to be fraudulent. Within Australia you can easily look up details on online phone directories or government web sites to verify that a person is who they say they are.

You can also get on the phone and call them, which is not only great customer service but can also help you identify when a purchaser may not be legitimate.

The Question

Hi Dale,

We've had 2 instances of dodgy credit card use for overseas orders on our site in the last month, one from UK & one from Venezuela & I'd say unfortunately we're about to get a few more back from Venezuela. What can we do about making it more secure so we don't get chargebacks for 'cardholder does not recognise transaction' all the time?

Australia Post can't do anything about tracking proof of delivery under 2KG. Any suggestions?


The Response

Hi Thad.

One of the things you can try for orders you think could be a problem is to get confirmation that the payment had been debited from their account by emailing them a day after you debit their credit card. Ask for them to check their online bank statement and cut and paste the transaction line (or alternatively to send a screen grab) and email it back to you.  You may need to come up with a creative reason in order to justify their effort. For example, "We need to ensure we have charged the correct card holder for this order as it is an international order."

You would then keep copies of these emails as you would then have a much more significant case if a chargeback was implemented on these transactions.  You could at least print out a copy of their email along with  the email headers and fax to the bank as further confirmation that the person approved the transaction and indeed emailed you to show the transaction had taken place, and so was fully aware.

It would not be practical to do this in all instances, but you might do this in cases where the order seems more likely to be fraudulent. Some signs that an order might be fraudulent include:

  1. Different delivery and billing addresses.
  2. Use of hotmail or gmail accounts as email addresses - free email accounts.
  3. Large orders above and beyond the normal value of an order - highly likely to be fraudulent.

By checking out your orders where chargebacks have been raised it is usually fairly obvious what signs to look for when a new order comes in.

Another alternative in instances where you are suspicious is to use PayPal.  Instead of processing the credit card - send an email saying we could not process your card, can you please pay via PayPal instead, and do a request money via PayPal (you'll need a PayPal account).  Payment through PayPal seems to be harder to fraudulently charge back as PayPal accounts take longer to setup and they do a number of additional checks on their membership to reduce fraud.


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